India's wholesale price inflation surprisingly decelerated in January; however, it might turn positive in Q1. WPI inflation dropped to -0.9% y/y in January from -0.7% y/y in December, as compared with Bloomberg's median expectation of -0.1% and Capital Economics' forecast of -0.2%. Wholesale price inflation has been negative for 15 continuous months.

The deceleration of inflation was mainly due to the fall in food inflation from 8.1% y/y in December to 6% y/y in January. Meanwhile, fuel inflation also dropped to -9.2% y/y in January, as compared with December's -9.1%. Non-food manufactured product inflation, which is a proxy for core price pressures, continued to be stable at -2.0% y/y in January.

India's WPI inflation is expected to accelerate again in the coming months and return to positive territory before the end of Q1. Food inflation, in particular, is expected to accelerate again due to crop shortages caused by warm weather in recent months. Also, if the Pay Commission's recommendation for a large pay rise for certain public sector workers is implemented, it could accelerate inflation, particularly if it results in higher wage settlements.

Meanwhile, the RBI, in its upcoming policy decisions is not expected to disregard the fact that the wholesale price inflation remains weak. However, this is less significant for policymaking than consumer price inflation, which includes a broader range of goods and services. It is also easy for international comparisons. The RBI will find it difficult to meet its medium-term CPI inflation targets, implying that the rate-cutting cycle has come to an end.

"We expect the repo rate to remain on hold at 6.75% throughout 2016", says Capital Economics.